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China's Growing Market for Medical Devices

Medical Device & Diagnostic Industry Magazine
MDDI Article Index

An MD&DI November 1997 Column

BOTTOM LINE

China, with a growing economy and a population of more than 1 billion, presents opportunities and challenges for U.S. medical device manufacturers.

China is the world's most populous country, accounting for 20% of its people. The sheer size of the country's population­1.2 billion in 1997 and growing by 16 million every year­makes it a valuable market for U.S. medical device exporters. Furthermore, China's booming economy, growing at an annual rate of approximately 10%, has increased the standard of living of many Chinese. As the population has become wealthier and more aware of health-care standards in other countries, demand for improved services has increased. In addition, as the population ages, its pressure on the medical network is increasing.

Figure 1. Breakdown of U.S. exports to China (U.S. Department of Commerce). Photo courtesy of China National Tourist Office

China's Ministry of Health (MOH), responsible for establishing health-care policy, is responding to demand. Improving access to basic health care and reducing the mortality rate are two official goals of the Chinese government, stated in the five-year plan for 1996­ 2000. This statement of intent has brought immediate results: China's 1996 medical device market totaled $1.3 billion, an increase of 28% over the previous year. The percentage increase was more than twice the rise in China's GNP for that year and reflects China's increasing commitment to advanced levels of health care. Given the strength of China's economy, this trend should continue.

Despite these positives, U.S. exports of medical devices to China have been uneven over the past four years (Figure 1). Credit restrictions, increased competition from Japanese and European manufacturers, growth in China's domestic manufacturing capabilities, and shifts in medical device regulation have all contributed to this situation. Although large manufacturers like Baxter and Johnson & Johnson continue to invest in China operations, other manufacturers are holding back, and at least one has withdrawn from the market.

A manufacturer thinking of entering the Chinese market must thoroughly research a wide range of issues, including the broad policies of the central government, relations between the United States and China, the structure and nature of regulatory authorities in China, the regulation of particular products, the need for those products, tariffs, and distribution.

THE PURCHASERS

Direct sales of imported goods in China, including medical equipment, are not possible. State-run trading companies take a cut of each deal, while adding little to the sale other than time and expenses. However, this situation should change if China accedes to the World Trade Organization, which requires member countries to allow direct distribution. In either case, the primary potential purchasers of medical devices in China are its hospitals. Although there are approximately 2000 private hospitals, most do not possess large medical equipment or laboratory facilities. Instead, public hospitals in China are the greatest purchasers of medical equipment.

Public hospitals can be divided into three types: MOH hospitals, People's Liberation Army (PLA) hospitals, and industrial hospitals created by state-owned companies.

Ministry of Health Hospitals. The largest health-care network is run by MOH and includes clinics, medical colleges, and research institutions. This network is subdivided by the level of government supervising each institution. This supervision roughly corresponds to the size of the institution, its technical sophistication, and its financial position and purchasing power. Hospitals, clinics, and medical colleges at the national and provincial levels are prospective end-users of advanced imported medical equipment. Institutions at the municipal level and below often lack the funding to consider purchasing such items but may be interested in refurbished or less-expensive equipment that is simple to use and maintain.

MOH hospitals are classified into three levels, with level III being the national level. Each level is further subdivided into three or four classes. Hospitals in the super class of level III have more than 500 beds and provide health care, public health, teaching, and research services. Roughly 1000 hospitals, or 1.6% of the health-care facilities in China, belong to level III. Roughly 12,900 hospitals, or 21%, belong to level II. Imported medical device marketers should target hospitals in the top class of level II and up, because lower-level hospitals are unlikely to have the funding or expertise to make purchases.

Doctors and hospital administrators determine medical device purchases in MOH hospitals. However, MOH has recently limited the authority of hospitals to purchase medical equipment and set prices for medical services. In recent years, hospital purchases were based on potential profit rather than medical benefits, with patients being encouraged to use high-tech medical equipment regardless of their medical condition because hospitals could charge fees for that use. To prevent misuse of equipment and control health-care costs, local governments will increase their participation in high-cost purchasing decisions according to regional health-plan requirements. In addition, control of public health-care service prices is being given to local authorities. If hospitals are forced to charge artificially low prices, they may be less likely to purchase imported medical equipment.

People's Liberation Army Hospitals. The PLA operates its own network of 300 to 400 hospitals and 4 medical colleges, providing care not only to China's 3.1 million servicemen and their families but also to many private citizens. These institutions have the reputation of being well funded and well equipped. The secrecy surrounding the military makes it difficult to get specific information about PLA medical equipment acquisitions, but the experience of a few companies indicates that the PLA is a worthwhile customer.

Industrial Hospitals. A relatively small number of industrial hospitals were established for workers in large state-owned enterprises and are run by the enterprises or their ministry. Because state enterprises are now facing private competition and can no longer rely on government subsidies, these hospitals are unlikely to purchase imported medical equipment. The most recent decision on public health reform issued by the central government calls for exploring ways to socialize the health organizations attached to state enterprises. This may mean that industrial hospitals will become part of the MOH network.


WHERE TO GO FOR HELP

The U.S. Department of Commerce's Office of Microelectronics, Medical Equipment, and Instrumentation provides export counseling, market data, and other information for medical device exporters. The department also staffs a worldwide network of commercial offices located in 96 U.S. cities and 79 countries, including China. Commercial Service officers assist U.S. companies through export counseling, researching and reporting on the market, conducting agent and distributor searches, and advising U.S. companies on individual business plans. For more information, contact the Commerce Department's Office of Microelectronics, Medical Equipment, and Instrumentation: phone 202/482-2410 or fax 202/482-0975.


THE REGULATORS

The degree to which medical devices are regulated in China is becoming increasingly important. China is implementing a regulatory regime that is opaque and in a state of transition. In the past, an exporter's agents took care of conformity requirements and included those costs in the sales commission. Recently, however, regulations applying to medical devices have been increasing and may become a significant obstacle to exporters.

A number of different governmental bodies make up the regulatory system; three of them are described below. Each body has its own fee structure, which is frequently unpublished. Some regulators negotiate fees case by case. Depending on its type, a device may be regulated by any one or all of these bodies.

State Pharmaceutical Administration of China (SPAC). Roughly speaking, SPAC plays the same role in China as FDA in the United States. The Medical Device Administration within SPAC is responsible for registering medical devices. Unlike FDA, however, SPAC has its own manufacturing companies that produce goods that compete with some imports. Although this strikes many in the United States as a conflict of interest, China is a self-proclaimed market economy with socialist characteristics, and the line between public and private is frequently blurred. SPAC is structured like MOH, with a central level in Beijing providing direction to provincial branches.

In an approximation of international practice, SPAC categorizes medical devices into three classes. Class I requires conventional management for safety and effectiveness, Class II requires more control, and Class III refers to products directly implanted into humans and requires the greatest level of supervision. All imported medical devices, regardless of class, must be registered with the central SPAC office in Beijing. The documents for registration are described in SPAC's Provisions Governing the Registration of Medical Device Products. Under the provisions' "Guide to Implementation," applicants who provide evidence of FDA approval or CE marking under the European system have been receiving expedited approval from SPAC.


TRADE MISSION TO CHINA OPEN TO DEVICE MANUFACTURERS

The Department of Commerce invites U.S. companies to participate in a medical device, medical device component, and laboratory instrument trade mission to China in April 1998. Covering four cities in 10 days, the mission is designed to offer maximum exposure to the Chinese market through stops in Beijing, Shanghai, Dalian, and Chengdu. At each stop, the department will arrange the following:

  • One-on-one meetings with potential buyers, agents, distributors, or joint venture partners.
  • Meetings with relevant Chinese government officials.
  • Briefings with Chamber of Commerce members who already have established businesses in that location.
  • Briefings with U.S. Embassy and Consulate staff.
  • An informal reception for further discussions with potential Chinese partners and government officials.
  • Site visits to manufacturing facilities and hospitals, as requested.

The cost of participating in the trade mission, excluding airfare, meals, and hotels, will be approximately $4000 per company and $1000 for each additional person from the company. An optional stop in Hong Kong for two days of one-on-one meetings with agents and distributors will be an additional $600. Firms interested in participating should contact:

Lauren Brosler, International Trade Specialist
U.S. Department of Commerce, ITA
Rm. 1015
Washington, DC 20230
Phone: 202/482-2410, fax: 202/482-0975


Ministry of Health. Until recently, MOH had little involvement with the direct regulation of medical equipment entering the Chinese market. Then, last June, the ministry issued Measures to Administrate and Supervise Biomaterials and Medical Devices, which covers certain specified invasive and implantable materials and devices. For imported goods, an application must be submitted to MOH, together with test samples and related documents, for examination by the China Institute for the Control of Pharmaceuticals and Biological Products. MOH may decide to conduct its own clinical tests on imported devices. Like SPAC, MOH also has a network of trading and manufacturing companies.

State Administration for Commodity Inspection (SACI). China has been gradually adopting a safety quality licensing system of mandatory inspection and certification for imported goods that affect public safety, health, and the environment. Certain medical devices fall under SACI's list of commodities, which is published as the First, Second, and Third Catalogues of Import Commodities Subject to the Safety Licensing System. Depending on the product, the safety licensing system requires any or all of the following: submission of product samples, design specifications, and testing data; and site inspections of each manufacturing plant. Although SACI holds the central authority for the safety quality licensing system, that authority has been delegated to other government bodies for some goods. For example, the Ministry of Labour has authority over boiler and pressure vessels, including autoclaves and medical sterilizers.

CONCLUSION

The Chinese market for medical devices is unique and requires extensive research. Although the risks are great, so are the potential gains. The five-year plan for 1996­2000 has already caused growth in the medical device market, and that growth can be expected to continue to the turn of the century.

Lauren Brosler is an international trade specialist for the U.S. Department of Commerce, Washington, DC.


Copyright ©1997 Medical Device & Diagnostic Industry
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